Hanwha Life Insurance Co., Ltd. (A088350) Earnings Call Transcript & Summary

[Foreign Language] Good morning, and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the first half of the fiscal Year 2020 earnings results by Hanwha Life Insurance. [Operator Instructions] Now we shall commence the presentation on the first half of the fiscal year 2020 earnings results by Hanwha Life Insurance.

[Interpreted] Good morning. I am Choi Sang-Wook from the IR part at Hanwha Life Insurance. We provide consecutive interpretation in Korean and English during the earnings conference for the first half of fiscal 2020. You can find the presentation materials on our IR website. Today, Han Young-Man, Head of the Financial Management team will give a presentation, which will be followed by the Q&A session. Now I will hand over to Mr. Han.

[Interpreted] Good morning. I am Han Young-Man, Head of the Financial Management team. Due to some internal schedule issues, I am going to present on behalf of CFO, Hyun-Chul Kim. Today's presentation was prepared solely for the convenience of investors in accordance with the separate financial statements under K-IFRS, and some numbers are subject to change after a full audit. I will now begin the report. Page 1 is key financials. In the first half of 2020, premium income and new business APE grew 14.5% and 4% year-on-year, respectively. While COVID-19 pose challenges to our business operations, the loss ratio and the expense ratio showed a trend of continued improvement and the variable guarantee reserves were recovered substantially, thanks to the rise in the stock indices. As a result, the net income in the first half of the year posted an 88.2% growth year-on-year. The RBC ratio remained solid at 261% on the back of valuation gains of securities available for sale. Page 2 is on premium income, which was up 14.5% year-on-year despite COVID-19-related concerns for challenges in conducting face-to-face sales activities. The premium income in the general accounts posted a 6.8% growth year-on-year. The share of the protection-type in the general accounts remained strong at 69%, thanks to our competitive protection products, such as special integrated whole life insurance and special cancer insurance. On Page 3, total APE grew 4% year-on-year. The APE breakdown by type is 58% protection, 16% annuities and 26% savings. The APE margin is 40.3%, and the annual APE margin target for Hanwha Life for this year is 42%. By product type, new business margin for protection-type is 65.5%; annuities, 10.4%; and savings, 3.5%. In particular, the protection APE margin showed a dramatic increase as the assumed rates were lower. On Page 4, the APE breakdown by channel shows that the FP channel accounts for 50%; GA, 13%; and the bancassurance, 33% in the first half of this year. The share of the bancassurance channel grew as a result of some large banks increasing their insurance sales. Meanwhile, the portion of protection sales in the FP channel and the GA channel were up to 93% and 81%, respectively. We will continue to focus on the sale of high-margin protection products utilizing our stable and competitive FP channels. Page 5 is on sales efficiency. In the second quarter, the 13th month and the 25th month persistency ratios recorded 85% and 59.6%, respectively, up 2.3 percentage points and 0.7 percentage points. Thanks to the efforts to improve the type agent incentive schemes and offer systematic education and training, the 13th month FP retention ratio remained highest in the industry at 50.8%, with the number of FPs increased to 19,276. On Page 6, Hanwha Life achieved profit improvement in all 3 margin categories in the first half of fiscal year 2020. While core insurance income continued to grow, the investment yields also improved on the back of the recovery of variable guarantee reserves and the replacing of short-term bonds with long-term bonds. As a result, the net income grew 88.2% year-on-year to record KRW 175.8 billion. Please refer to the presentation slide for the detailed movement by margin type. Page 7 is on core insurance income. In the first half of 2020, the loss ratio recorded 80.2% and the mortality gains recorded KRW 230 billion, along with the decline in hospital visits amid COVID-19 and the growth in risk premiums as a result of increasing protection sales. Hanwha Life posted expense ratio of 15.5% and expense target of KRW 149.8 billion, mainly on the back of the rise in premium income and assumed expenses, thanks to the greater sales and better [indiscernible]. Page 8 is on investment. The investment portfolio is mainly comprised of interest-bearing assets, with 44% domestic bonds, 26% overseas securities and 23% loans. The investment yield in the first half of this year recorded 3.58%, mainly thanks to the disposal gains in the process of replacing short-term bonds with long-term bonds to expand the asset duration. Page 9 is on the bond portfolio. In the first half of 2020, thanks to active ALM, the bond duration increased to 11.15 years, and a portion of long-dated bonds, both domestic and overseas combined, increased to 88%. As for our portfolio quality, 97% of overseas bonds are rated single A or higher, and 96% of domestic bonds are rated AAA or higher. On Page 10, the loan portfolio consists of 44% alternative investment, 28% policy loans and 28% retail loans. Despite concerns over economic downturn, the loan portfolio quality has been managed stably with the NPL ratio of 0.09%; and the delinquency ratio, 0.22% in the second quarter. Finally, on Page 11, the crediting rate has structurally improved to 4.47%. The RBC ratio in the first half of 2020 achieved 261%, up 39.7 percentage points year-on-year, thanks to the increase in bond valuation gains. The duration gap improved substantially to 0.23 years compared to the previous quarter, thanks to active ALM to increase the asset duration. This is the end of the report. Thank you.

[Foreign Language] The first question will be provided by Jin-Sang Kim from Hyundai Motor Company Securities.

[Interpreted] I am Kim Jin-Sang from Hyundai Motor Group Securities. Thank you for the good results and I have 2 questions. The first question is that I can see that there was a big growth in your net income. And can you tell us any distinctive factors that have contributed to this good result for the second quarter versus the first quarter? And how much were amounts from these items? And the second question is that it seems that the growth trend for protection APE is rather slow compared to the other types. Of course, the margin is really good for protection type. But compared to the total APE growth trend, the protection APE growth trends seems to be a little lower. So can you tell us your projection for the future going forward?

[Interpreted] I am [ Yoon Jong-kook ] from the corporate planning and administration team, let me comment on the first question. The first item that I can share with you is about assets related to dLife and Carlyle, which were -- which used to be recognized as assets for losses. In the first half of this year, we recognized impaired losses of KRW 40 billion for dLife and KRW 9.7 billion for Carlyle. And the next item is on the losses on the part of variable guarantee. In the first quarter of this year, because of the downturn in the market, the bond yields have gone down. And as a result, we recognized the losses of KRW 230 billion in the first quarter. And thanks to the improvement in the markets overall in the second quarter, we were able to recover about KRW 160 billion out of KRW 230 billion that we recognized previously. Another contributing factor for better earnings results for this half of this year is mainly that there was a process of shifting the nature of the portfolio, especially the bond portfolio because overseas bonds became less attractive and we went into the process of replacing overseas bonds with domestic bonds in the first half.

[Foreign Language] The following question will be presented by Seung-Gun Kang from KB Securities.

[Interpreted] I am Kang Seung-Gun. I have 2 questions. The first question is that are you planning to consider the decision of lowering assumed rates additionally in the second half of this year? What will be the conditions that will lead you to lower the expense rates further in the second half? The second question is that when it comes to the separate financial basis, in the second quarter, the net income is KRW 128 billion. But on the consolidated basis, the net income goes down to KRW 79.6 billion. So can you explain the background behind this difference between the separate and the consolidated net income?

[Interpreted] I am [ Seung Yeon-uk ] the product development team. Let me answer the first question. Hanwha Life Insurance already has proactively lowered the assumed rate by, first on April 1 and second on July 1. So our assumed rate level is among the lowest in the industry already. When we were lowering assumed rates on July 1, at that time, the 5-year rate in May, as of May, was 1.1%, and this rate has been maintained for some time. So if we don't see any substantial change in the interest rates, we don't have any plans to lower the assumed rates in the second half. However, we will continue to monitor the market situation and respond appropriately.

[Interpreted] I am from the Han Young-Man from the Financial Management team. Let me answer your second question. As you pointed out, on the consolidated basis, the net income for the first half is KRW 176.1 billion, which is down by KRW 13.1 billion. So as for the reason for difference between the 2 figures, you can see that there is a positive contribution of KRW 51.5 billion from Hanwha General Insurance and other consolidated companies and negative KRW 53.1 billion from the consolidation of securities and negative KRW 11.5 billion from affiliate companies.

[Interpreted] I would appreciate it if you could give us a breakdown on a quarter-over-quarter basis instead of the first half as a whole?

[Interpreted] We have prepared this report on first half of this year basis. So right after this conference, I will get back to you with the quarterly report.

[Foreign Language] The following question will be presented by Jun-Sup Jung from NH Investment & Securities.

[Interpreted] I am Jung Jun-Sup from NH Investment & Securities. I have a question related to your investment yield. On Page 6, you can see that the investment margin was negative KRW 49 billion in the second quarter, but as you mentioned during the Q&A session, there was a recovery of the variable guarantee reserves of about KRW 160 billion in the second quarter. So if we assume that, that did not happen, then the interest margin would go down to negative KRW 200 billion. So I'd like to know if this understanding is correct. And if this situation has influenced your investment strategies or maybe it was mainly due to the changes related to Carlyle and dLife. And so ultimately, what I want to know is your overall projection for interest margin in the second half of this year.

[Interpreted] I am in [ Yoon Jong-kook ] from the corporate planning and administration team. Yes, as you pointed out, the interest losses in the second quarter was KRW 49 billion, which had factored into account, the recovery of KRW 160 billion of gains from the variable guarantee reserves. So when we take these 2 items accounts, then the interest losses would be a negative KRW 200 billion of losses. And this takes into account 50 billion coming from dLife and Carlyle. I believe that you want to know our projection for spread margin going forward. I believe that the negative spread margin trend will continue, but there is a big volatility because it has to do with our losses and gains and capital gains and the changes to the variable guarantee reserves. But as of today, I would say that the negative spread margin projection is about KRW 400 billion to KRW 500 billion.

[Foreign Language] The following question will be presented by Kim Myung Wook from JPMorgan.

[Interpreted] I am Kim Myung Wook from JPMorgan. I have 2 questions. The first question is about provisioning for liabilities. And when we look at the current interest rate trend, it seems that the provisioning for liabilities has improved quite substantially compared to the previous years. So do you think that this trend will continue for some time? Or is it something that we experienced only temporarily for the first half of this year? The second question is related to asset management and allocation. Hanwha Life has been replacing short overseas bonds with domestic bonds in a short period of time to reallocate your portfolio. So I understand that this decision has been carried out in part to improve the duration mismatch situations between assets and liabilities, but there are still concerns that this type of portfolio allocation will lead to difficulties in generating good investment yields. So what is your new money yield situation and the new money yield target? And in doing active allocation, what is your assumption or projection for the long-term interest rate domestically, Korean long-term interest rates for the next 12 years -- 12 months?

[Interpreted] I am [ Kim Byung-wook ] from the risk management team. I understand that your question is related to the credit rate on the product provisioning for liabilities. As for the fixed rate portion of the crediting rate has gone down by about 10 basis points compared to the previous year. And overall, the total crediting rate has to do with the public or offered rates. And the offered rates have gone down by 10 basis points compared to the last year. So right now the crediting rate stands at 4.47%, which is 11 basis points lower. And as for the future trends on the crediting rate, there's no extraordinary events that we are anticipating. But as I mentioned before, on the fixed rate part, there will be a trend of lowering by 10 basis on a year-over-year basis. And then depending on the investment yield and market interest rate situation, the offering rate will continue to decline for some time. So we expect that the crediting rate for Hanwha Life Insurance will go down by 10 basis points on a year-over-year basis.

[Interpreted] I am [ Kim Kee-Dong ] from the investment business team, let me comment on your question on investment management. And I'd like to share with you the strategy, investment strategy for Hanwha Life, which has been the target. Our first target is, of course, to extend the asset duration, something that we have to continue to do, not only for the sake of reducing duration gap, but also in preparation for the new regime such as K-ICS. Therefore, whether they are overseas funds or domestic bonds, we have to -- we are in a position to continue to have bonds, both domestic and overseas regardless of interest rate situations. And in the first half of this year, we replaced overseas bonds with domestic bonds purely because of attractiveness differences. As for the regulatory aspects, recently, the bond forward was recognized as part of the asset duration. So this is a good news for us. Last year, our target for asset duration for this year was -- last year, it was 8.4 years and this year, 9.2 years, but I think that we can expand the asset duration further this year. And now our second target is to improve the investment yield. In order to do so, we have been identifying good alternative investment opportunities and it is not just for increasing investment yields, but also in consideration of the capital costs involved. And so we have been continuing to evaluate our values of different investment opportunities on the basis of market value. And at the same time, in order to boost -- further boost investment yield, we're looking into ways to increase the policy loans in the retail loans because they bring higher investment yields even though their durations are shorter. So we have a task force team working on this. So basically, our strategy is along the interest-bearing assets, we have assets that are dedicated for duration management in order to increase -- in order to decrease interest rate sensitivity. On the other hand, there are parts of fixed income securities that are driving the investment yield. And the second part of your question was on our assumptions for long-term public bonds, interest rate trends and I'd like to share with you our projection for the 30-year. So currently, the 30-year bond yield is about 1.5% to 1.6%. As for the volume, it's about KRW 3 trillion, but then the demand is pretty much fixed because NPS, pension takes 30% and the 3 top life insurance companies, including us, we each take about 10%. So while the demand side is pretty stable, the question here is the supply side. So we're currently monitoring the budget situations of the Korean government and we believe that for some time, this rate of 1.5% to 1.6% will remain unchanged. And for another part of the strategy, I mentioned about bond forward, which will help increase the asset duration, while it does not involve cash. So for some portion of the portfolio, we're going to utilize this to increase our balance.

[Foreign Language] The following question will be presented by Byung Gun Lee from DB Financial Investment.

[Interpreted] I am Lee Byung Gun from the DB Financial Investment. I have 2 questions. The first question has to do with long-term risk loss ratio. In the second quarter, the long-term risk loss ratio was 73%, which has improved. But can you tell us the breakdown of long-term risk loss ratio by coverage type? And what was the impact of COVID-19 as of today? And what will be the impact projected forward? The second question has to do with assumed rates and decisions related to that. You mentioned in the previous Q&A that you are not planning to further lower the assumed rates given the current interest rate level remains the same and I believe that your action to lower the assumed rates on July 1 was very good. But I wonder if there was any reason why you would have to or would not have to lower the assumed rates in the second half. Because when you think about the domestic bond rate right now, it's about, let's say, given the current interest rate level, the new money yield from domestic bonds would not be over 1.8%. So this is pretty low. And it has to maybe go down considering the guaranteed rates in the overseas markets. So do you think that it is okay for Hanwha Life or other life insurance companies to maintain the current assumed rates? Or do you think there will be any situation where you would have to lower the assumed rates further? And in addition to that, I'd like to know the sensitivity of new money -- sensitivity of the new business margin to the assumed rates lower by 25 basis points. So considering the current portfolio mix, what will be the sensitivity of new business value to 25 basis point lowering of assumed rates.

[Interpreted] I am [ Yoo Won-gook ] from the claims management. Let me first comment on the impact of COVID-19 on the -- under -- on claims management. As for accident claims, which used to increase in the past, but it has -- it started to go down in February and it bottomed out in March. And currently, the accident liability claims are on the rise. And in the first half of this year, due to COVID-19, there was less frequency in making -- taking health checkups and there were less visit to large hospitals. So there was a trend of decrease in living benefit claims in the first half. So this has impacted about 6 percentage points on the loss ratio and for medical indemnity, this has the impact of 4 percentage points lower. We believe that the impact of COVID-19 will be sustained in the second half of this year. However, we have been successful in selling other protection-type products, which are leading to higher risk premium income coming in. So we believe that the loss ratio for this year is going to be around 79%. So by coverage time, in the first half of this year, death benefit claims have increased because this was not affected by COVID-19 greatly. But there was a decrease in living benefits, including diagnosis benefits, operations, surgery and hospitalization benefits. But recently, there is a recovery of the frequency of making health checkups. And so it's becoming more normalized. So I believe that the living benefit claims for diagnosis or surgery and hospitalization will be recovered to the usual level by the end of this year.

[Interpreted] I'm [ Seung Yeon-uk ] from the product development team. Let me answer the second question. We agree with the view that you expressed about assumed rate situation in Korea right now, we understand that the current assumed rate level is higher than the market rate. However, we believe that there are some risks in taking our unilateral action of lowering -- further lowering the assumed rates, given the market situations because we already have very low assumed rate in the industry. So we would have to see what the other competitors are doing. As you pointed out, the impact of changing assumed rates is pretty substantial and we've already implemented the action twice this year, while the other companies have not done so accordingly. So there is some risk and concerns about the potential of additional lowering of assumed rates in the future. But we will have to continue to monitor the market situation. If the situation is worse, then we will have to take action proactively. But otherwise, it will be pretty much the same. As for your question on the sensitivity of APE margin to 25 basis point change, this sensitivity may change according to our assumptions. So please refer to the participation material, where you can see that the APE margin improved by about 10%, which has to do with our action to lower the assumed rates as well as changes in the portfolio, especially with respect to protection type.

[Foreign Language] The following question will be presented by Do Ha Kim from Cape Investment & Securities.

[Interpreted] I am Kim Do Ha from the Cape Investment & Securities. I have 2 questions. The first question has to do with the RBC ratio. You mentioned that utilizing interest rate-related derivative products will help increase the asset duration. We understand the idea of the notion, but we don't really understand the actual impact it will have on the RBC aspect. So assuming that you will start utilizing these types of products from September this year, this will lead to longer asset duration. But at the same time, due to changes to LAT-related regulations, the liability side duration will be extended as well. So given that there will be no additional major valuation gains from the bond portfolio, what will be the RBC ratio target for this year, by the end of this year? It will be really nice if you could break that down to asset duration, liability duration and the RBC ratio projection. The second question is on investment. In the past, you utilized alternative investment assets and overseas investment quite actively. And recently, the global stock markets have rebounded, but still when it comes to the real assets and other properties, the situations may not be that favorable. So I'd like to know if there was any default cases or any issues with cash flow of some of the investments that you have made overseas?

[Interpreted] I'm [ Kim Byung-wook ] from the risk management team. Your question is related to the impact of using interest rate derivative products on the RBC ratio and the sensitivity to the duration. If we utilize such products that's worth KRW 1 trillion, the impact on the duration will be 0.1 years. And so when it comes to the RBC ratio, you may -- and I can comment on the interest rate risk amount. We don't have the rate -- we don't have the duration mismatch risk amount that much because we have much greater minimum guarantee -- minimum interest rate guarantee risk amount, which is much larger. So if we decide to utilize through those products, this is not going to be for the benefit of lowering risk amount for RBC, but rather, it is to minimize volatility related to K-ICS and other accounting regimes. So given all these changes and the situation, we believe that the impact of additional regulatory changes in the RBC's tightening in the second half of this year will be quite minimal. So the impact will be minimal. So given the current interest rate trends and the protections and the regulatory changes, if we take all of these accounts, by the end of this year, we believe we can maintain the RBC ratio at least above 250%.

[Interpreted] I'm [ Kim Kee-Dong ] from the investment business team. Let me answer your question on alternative investments. So this is 1 thing that I want to mention first. When we are making alternative investment decisions, of course, it's case by case. But overall, our target yield is mid 3%. So our target yield is relatively lower compared to other life insurance companies. So you can approach this by tranche by tranche but overall, the percentage of senior assets is much higher. So we are quite conservative in this regard. And as for the quality of these assets invested, of course, it has to do with a prolonged economic depression, how long this economic downtrend will continue. And if it does continue for some time, it could be a burden on us. As per loss recognition, the Carlyle fund, this was an energy fund. And due to the oil price drop, we almost recognize the entire amount as losses. And what we are watching carefully is the loans extended to some hotels in New York, London and Tokyo, and the amount is about KRW 200 billion. And there was no -- there is no problem with principal repayment because we have secured properties -- backed by secured properties. But 3 out of 6 cases, the interest payment has been delayed. But overall, the situation has been improving. Of course, we have to continue to monitor the market situation. But so far, there's no major AI loan or assets that we have to recognize that losses.

[Interpreted] I asked this question because there were some even non-life insurance companies who have now fallen into a different category because they're -- but as for Hanwha Life, is it safe to say that by the end of this year, the minimum interest guarantee amount will be recognized instead?

[Interpreted] Yes.

[Foreign Language] The following question will be presented by HeeYeon Lim from Shinhan Investment.

[Interpreted] I'm Lim HeeYeon from Shinhan Investment -- Shinhan Financial Investment. I have 2 questions. The first question is related to the percentages of savings and retirement in your portfolio. In the first quarter as well as in the second quarter, the portion of savings has increased and this seems to be in contrast to your mid- to long-term strategy. So I thought about this and maybe the increase in savings type would lead to improvement in the expense margin, that could be a question because you can extend the limit for deferred acquisition costs, which may lead to a better expense management. And also, I can see that there was an increase in retirement accounts. So is that pretty much in the same line? And will these changes lead to better expense margin? The second question has to do with your channel strategy. Starting from next year, the revised incentive scheme for general agents will be implemented and this will lead to some changes to your channel strategy. So do you think you will substantially change your GA strategy because there is going to be a ceiling on incentives and rewards you can give out to general account -- general agents. And will this lead to some changes to your expense margin? And going forward, what would be your target for the GA channel as part of the entire channel mix?

[Interpreted] I am [ Ih Gyung-kook ] from the strategic channel team, let me answer your questions. First on the increase in savings, premium and retirement pension. Our main strategy is to promote the sale of protection-type products. But in the first half of this year, there was an increase in premiums coming for savings products, mainly due to the bancassurance channel. As the market interest rates are really low, the banks -- some banks decided to push for bancassurance insurance sales. So overall as for the entire industry, the bancassurance channel volume increased by KRW 10 billion per month. And for us, it was KRW 1.5 billion growth per month. So this has led to the changes in our product mix. And our strategy for the bancassurance channel in the second half of this year is to refrain from pushing for savings but rather promoting annuities and other higher-margin products. And let me comment on the background behind the increase in retirement accounts. And one of the reasons for this increase was new MOUs signed with new organizations. Given the very low interest rate situation, we are refraining from engaging in margin competition when it comes to retirement accounts. So going forward in the second half, as for retirement accounts, we're going to push for higher margins. Now let me comment on the incentive ceiling for agents. It's not been finally decided yet, but we believe that the FFT going to go for the limit of 1,200% of commission rate. In the past, the life and non-life insurance companies were competing on the base of incentives and commissions in the GA channel, but we will have to move away from that and focus more on having competitive sales activities and higher and better competitive products. Because this means that we will be staying out of promotion-based or incentive-based competition, this is going to have a positive impact on our expense ratio. And we're constantly monitoring the market situation and the competition landscape to revise our strategies. And as for the type agent channel, it's not going to be subject to 1,200% limit. So we will continue to monitor what the FFT will do in the future. Thank you.

[Interpreted] Further clarifying question. So is it safe to say that increase in savings sales will not have a major impact on your expense ratio? It may or may not have to do with increase or increasing your actual expenses because the reason why I'm asking this question is that recently your earnings, your overall revenue figures are pretty stable, and that seems to be related to your expense management. So I wonder if the current earnings trend is sustainable or not.

[Interpreted] I am [ Yoon Jong-kook ] from the corporate planning and administration team, the commissions and -- coming from savings sales and the retirement accounts does not have substantial impact on the expense side. The reason why we're maintaining good expense gains is because of sales of protection products, including other protection products.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions]

[Interpreted] With no further questions, we'd like to conclude the earnings conference for the first half of 2020. I'd like to thank you all for your participation. If you have any further inquiries, please contact the IR part. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]